June 18 (Bloomberg) -- Hexion Specialty Chemicals Inc., a unit of Apollo Management LP, sued to cancel its $10.6 billion acquisition of Huntsman Corp. because banks probably won't provide debt financing. Huntsman stock plunged.

Huntsman's net debt has increased and its earnings were lower than expected since the companies agreed to merge in July, Columbus, Ohio-based Hexion said in a complaint filed today in Delaware Chancery Court in Wilmington. The capital structure for the combined entity is no longer viable and would render it insolvent, the company said.

Huntsman, run from Salt Lake City and The Woodlands, Texas, agreed to be acquired by Hexion for $28 a share. Huntsman Chief Financial Officer J. Kimo Esplin said in May that Hexion, the biggest plywood-adhesives producer, still has financing commitments from Credit Suisse Group and Deutsche Bank AG.

``The financing for the acquisition is predicated on a certain level of financial performance and, given the increase in Huntsman's total debt and decrease in earnings, Hexion does not believe that the transaction can be completed,'' Hexion Chief Executive Officer Craig O. Morrison said in a statement.

Huntsman dropped $7.96, or 38 percent, to $12.90 at 7:27 p.m. in electronic trading after the close of the New York Stock Exchange.

The stock might drop to $8 to $12, based on Huntsman's anticipated 2009 earnings, if the transaction is terminated, Jeffrey J. Zekauskas, a New York-based analyst at J.P. Morgan Chase & Co., said after the company reported earnings in May.

Pressure on Companies

``The economic downturn is putting pressure on companies' earnings and that's causing these deals to crash and burn,'' said Larry Hamermesh, a Widener University law professor who specializes in Delaware corporate law issues.

Chancery judges decide whether a suitor can terminate a merger by determining if the cause of a company's worsening results is deeper than a couple of bad quarters, Hamermesh said today in a phone interview.

``It has to be something like a shift in technology or some kind of more long-term development to justify canceling these deals,'' he said.

Huntsman shares were trading at a 26 percent discount to the deal price before today's announcement. That indicates investors were expecting the deal to fail, said Hassan Ahmed, a New York-based analyst at HSBC Securities.

Huntsman didn't use enough proceeds from asset sales to pay down debt, and earnings kept falling, said Ahmed, who rates the shares ``underweight.''

`Credit Crunch'

``The deal price never made sense to me,'' Ahmed said in a phone interview. ``Then the credit crunch happened and the deal definitely didn't look smart.''

The transaction includes $4 billion of assumed debt and $100 million toward a $200 million fee that Huntsman paid Access Industries Holdings LLC to end their merger agreement. Access, based in New York, had offered to buy Huntsman for $25.25 a share before Hexion bid $27.25 and then $28.

Hexion shouldn't have to pay Huntsman a $325 million fee to end the merger because Huntsman's financial deterioration constitutes a ``material adverse effect'' under their agreement, Hexion said.

Other companies that have used similar tactics to rescind buyout offers have found difficulties with Delaware's corporate laws.

Tyson Acquisition

A chancery judge forced Tyson Foods Inc., the second- largest U.S. poultry producer after Pilgrim's Pride, to complete a $4.7 billion acquisition of rival IBP Inc in 2001. Tyson executives had alleged that IBP officials concealed information about their company's finances.

Judge Leo Strine found IBP disclosed the problems before the sale and Tyson had no legal basis for pulling out of the deal. He noted that the food processor was motivated by ``buyer's regret.''

Apollo, the New York-based private-equity firm run by Leon Black, assembled closely held Hexion through a series of acquisitions. Apollo didn't commit any cash from its funds to the Huntsman transaction and isn't responsible for any portion of the termination fee, according to the suit.

Huntsman's adjusted earnings in the first quarter fell to 7 cents a share, from 23 cents a year earlier, because costs for raw materials rose faster than prices, JPMorgan analyst Zekauskas said in a May report. Profit fell 36 percent in the textile dyes business and 50 percent in the pigment unit, which Hexion cited in the suit as the worst performers.

Huntsman spokesman Russ Stolle declined to immediately comment. Hexion spokesman John Kompa didn't immediately return a call for comment. Representative for Hexion's lenders, Deutsche Bank and Credit Suisse, declined to comment.

The case is Hexion Specialty Chemicals Inc. v. Huntsman Corp., CA3841, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jack Kaskey in New York at jkaskey@bloomberg.net; Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

Last Updated: June 18, 2008 20:26 EDT